The Fizz! Blog

How does Maternity Pay work for freelancers?

If you’re a sole trader you don’t qualify for Statutory Maternity Pay - that’s only payable to employees. However, there are two bits of good news:

1. You’re very likely to get Maternity Allowance instead. That’s the State Benefit for those who don’t qualify for SMP. Most freelancers will get it at a similar rate to SMP.
2. Unlike SMP, Maternity Allowance isn’t taxable! So someone getting that standard rate of Maternity Allowance will probably be better off than someone getting the same amount of SMP.

The downside is that, unlike an employee, you don’t get 90% of your usual income for the first six weeks - you just get the standard rate throughout. You’re likely to be a little worse off in that respect - but the tax saving will compensate anyway.

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How does Statutory Maternity Pay work for company directors?

Company directors are entitled to SMP on the exact same basis as any other employee - assuming they were on the payroll at the right time, then they’re entitled to 90% of their normal pay for six weeks, and then at a standard level for the next 33. In practice, the company carries on paying the director’s salary as usual, but HMRC reimburses the company for the majority. But, although the rules are just the normal rules, the different circumstances they’re being applied to leads to some wrinkles:

• More often than not (for sensible tax-planning purposes) a director will be paid a pretty low salary compared to other employees. That means that the first six weeks at 90% of normal pay aren’t actually that exciting.
• SMP is only payable whilst you’re still on maternity leave. Business owners tend to come back to the business rather more quickly than the typical employee (particularly if they themselves are the entire workforce!). After 10 “keeping in touch” days, SMP is no longer payable, and that can happen fairly early on for an owner-director.
• Usually HMRC reimburses an employer for SMP by knocking it off the monthly PAYE payments the employer makes to them. But if the director is the only employee, there might be no such monthly PAYE payments. In that case, by default HMRC will reimburse the company after the end of each tax year, but that could cause cashflow issues in the meantime. If so, it’s possible for the employer to ask HMRC to give it the cash up front, to be dripped out to the director as SMP over the period of leave.  That system actually works quite well. Be careful though - if the director comes back to work earlier than anticipated, the company will have to return some of that up front payment to HMRC, and in the meantime the extra lump of money in the company bank account hasn’t really given you any more money to pay dividends or any other costs - else, it’s sitting there to subside the salary over the period of leave.

In general, everything about the system works well - as long as you let your accountant know when you’re going on leave and when you return, anyway!

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Do you always get what you pay for with accounts and tax?

There’s a natural and reasonable assumption in accounts and tax that the quality of the work and service you get is likely to be in some way proportionate to the fee you pay.  This is somewhat true, and somewhat untrue.  It’s somewhat true as there are providers who will focus on a price-based, “conveyor belt” kind of service, and there are providers who will focus on a more supportive and holistic service.  We’re the latter, but there’s a place for both, just as long as you know what you’re signing up for.

But you do come across plenty of occasions where people pay quite a lot of money for something not commensurate with the cost - and also some where people get great work or service for a lower fee than the provider could really charge.

Why might someone be “overcharged”?

• You might not be the kind of client your accountant would generally work with (classically, you might be a small fish in a big pond) but they don’t mind doing the work if the money is right.
• They might not want to work with you at all, and hiked the fees in the hope that you’ll leave.  This is a terrible plan (they’ll find you just as irritating, and now also feel slightly dirty about the amount they’re charging you!) but it’s very common advice on accountancy forums nevertheless.
• They might be overstretched, with good intentions not matched by the capacity to execute.
• They might habitually hike fees up every year until they meet some resistance.  From a cold, commercial perspective that’s not a crazy thing to do.
• They might actually be doing really good work but not telling you about it.  This is surprisingly common.  When we take on a new client who has been unhappy with the work or service levels of their previous accountant, at least 75% of the time the work is actually completely fine, just ill-communicated.
• But they might actually just not be good enough.  You do get cases where an accountant has agreed a premium fee that would be fine if they were doing a great job, but they just don’t have the level of competence to know what a great job is. 

Why might someone be “undercharged”?

• An accountant might not be very good at valuing their services.
• They might have a good idea of the proper commercial value, but lack self-confidence!
• They might be trying to win work on price initially with the intention of hiking fees up later on (we don’t think this is a good plan ourselves, unless you’re completely explicit about what the eventual fee might look like and what the discount is, but it certainly happens).
• They might have a simple life and low overheads and simply be happy with reliable work that gives them an amount of money that they’re satisfied with.  There’s more to life than maximising profits.

Clearly a once-a-year form filling service should be cheaper than a service with more regular support and check-ins.  But it’s possible to get sucked into the former at the price of the latter.  Be careful!

One more thing - it’s tempting to try and negotiate hard and get services at the lowest price possible.  This is quite logical and definitely a reasonable idea with a one-off transaction.  If you’re buying a car, play hardball!  The problem with applying that to an ongoing annual service, though, is that you’re going to quickly find yourself with a provider who resents you, over and over and over again.  Try and find a fee that you *and* your accountant are both content with!

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I've been told my contract is inside IR35 - but what does that mean in practical terms?

Previously on IR35:

• The legislation informally known as IR35 was introduced 23 years ago.  It aimed to prevent those billing via a limited company whilst performing an employee-style role for a customer from benefiting from any of a limited company’s tax advantages; instead they were to pay full employment taxes.
• It didn’t work, because it was self-assessed, and turkeys rarely vote for Christmas.
• In 2017, as a result, the responsibility for making the call changed - if you worked for a public body, the public body would decide if IR35 applied.  If it did, full employment taxes would apply and you’d just be paid the net.
• In 2021 (having been postponed for one year due to COVID), this was extended to large customers - similarly, it became their call on IR35 and their risk if they decided not to account for employment taxes.

If you’re a contractor or freelancer working longish projects with big or public sector customers, it’s therefore quite likely you’ll encounter IR35 these days.  But, if a customer or agency tells you that a contract is inside IR35, what does this mean to you in practice?   This isn’t necessarily a simple question, as there are a number of routes that the customer may take, with the literal implementation of the IR35 rules being the least common by far:

1. They might just put you on PAYE.
2. They might pay you via an umbrella company (from your point of view, this is to all intents and purposes exactly the same as PAYE).
3. They just might actually implement the IR35 process - we don’t see it often, but we do see it occasionally.  If they do, then you’ll send them invoices from your limited company as normal, but they’ll pay the invoices net of tax and National Insurance relating to you personally.  This is obviously a very weird concept, and since all three routes are designed to get to the same split of the money between you and HMRC, the well-worn road of PAYE/umbrella generally looks much more appealing to all concerned.

If you get the choice, your accountant will thank you for picking #1 or #2!  We don’t need the hassle of #3 either.

Here are three practical points to be aware of:

1. Make sure you know whether a contract is inside or outside IR35 before you sign it!
2. Be aware that an inside IR35 contract will leave you with less money in your pocket than an outside IR35 one.  How much less?  That will vary depending on the bigger picture of your whole situation, but as a rule of thumb you might consider that you’d need a 25% day rate hike to stand still.
3. You should talk to your accountant at the outset of the new gig, not later on down the line - as well as the decision on whether to accept the contract, there will very likely be other actions to take too.  It might well be appropriate to pause salary or dividends from your own company whilst working on an inside IR35 contract, and that can’t legitimately be done retrospectively.

It’d be nice if everyone had a common understanding of what inside IR35 means, and the steps we’ll all take when that’s the case.  Until then, you’ll always need to press until you find out what’s actually going to happen in practical terms.

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My customer hasn’t paid their invoice - what can I do?

Understandably, many freelancers and other small business owners are reluctant to chase payment of invoices - they fear that it might cause problems in their relationship with the client.  In honesty, we think that fear is almost always misplaced - businesses that don’t pay invoices on time generally see that as part of the general cut-and-thrust of commercial life, and are likely to think that chasing them is a perfectly reasonable thing for you to be doing!

But if you’re still not comfortable doing it, there are a couple of other routes you could consider in order to depersonalise things.  You can fire reminders out of your accounts software (we’ll discuss statements of account shortly), rather than sending them personally (Xero even has the facility to send payment reminders automatically when an invoice becomes overdue - though if you do that, you need to make sure you keep everything up to date, lest Xero remind someone who has already paid!).  Or (/and) you could create a separate email address for your “accounts department” and have financial stuff go through another account entirely.

Broadly, businesses tend to pay invoices based on one of three triggers:

• The invoice (either paying it immediately or in some sort of scheduled pay run).  In an ideal world, you only have this type of customer!  Obviously the important thing with these customers is just to get an accurate invoice out on time to the right person.  If you’re dealing regularly with repeat customers, you might also consider getting something in place to just collect money from them automatically without their needing to lift a finger.  We use GoCardless for 95% of our invoices; it collects them automatically by direct debit on the due date and does the Xero reconciliation of the payments for us, saving time and effort all round.
• A statement of account.  This is a periodic (usually monthly) document summarising what a customer owes at a given point in time.  Big businesses are very used to issuing and receiving them.  They’re very easy to generate and send out via any mainstream accounting software.  If you have multiple customers owing you money at any point in time, you might want to just diarise sending out statements of account every month to anyone with an overdue invoice (we do), as this will quite often prompt payment of a forgotten invoice, or a request for a duplicate of one that’s gone astray.
• A legal threat!  It’s actually obviously highly unusual for that to be someone’s literal trigger, though we have been aware of a couple of local businesses over the years who routinely wouldn’t pay a bill until they got a threat of legal action.  Again, for them it just seemed to be part of the game of business.  Fortunately we were not amongst their suppliers!   We have seen clients have success getting payment of overdue invoices simply via a lawyer’s letter, either from a low-cost online provider like Thomas Higgins, or a firm they have a broader relationship with.  Of course, we’ve also seen clients who’ve had to go further down the legal process.

Something else to consider - if an invoice is paid late, you’re entitled to charge interest.  This is another thing that businesses are understandably reluctant to do - but which in reality we’ve never seen cause a problem.  Another part of the game for late payers.

The Small Business Commissioner has some more useful suggestions about how you might go about making sure invoices to your customer are received, processed and paid properly.  Try to get past any reluctance to assert yourself, especially once invoices are actually late - from that point, most customers will genuinely recognise you’re just doing your job!

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Why you should raise sales invoices on your accounting software

It’s very surprising how many businesses don’t create their sales invoices on their accounting software. It’s far from uncommon to take on a client and find they create sales invoices elsewhere, send them out, and track whether or not they’ve been paid using either a spreadsheet - or even via some more informal system. This is a shame, for a few reasons:

• It doesn’t save any work at all - it probably creates more work, as a VAT registered business is going to have to recreate the invoice in its accounting software anyway.
  It could mean confusion. They might send out an invoice, amend the invoice, and give the old invoice to their accountant for accounts or VAT prep, meaning there’s work to be done to figure out why the amounts coming into the bank don’t match what’s being paid.
  As a worst case scenario, it could mean they lose out financially. For example, they might send out an invoice, forget to track it, never be paid, and never notice.

If the invoice is created in accounting software in the first place, and emailed out from there, there’s one unambiguous source of truth about how much the invoice is for (if you amend it, you’ll amend it in the software), and one unambiguous source of truth about whether it’s been paid or not - amounts coming into the business bank account must be logged against the invoices they’re settling, so if everything’s up to date you can generate a list of outstanding invoices at the click of a button.

The most common objection to generating invoices using accounting software - particularly amongst businesses in creative industries - is that they won’t look precisely as the business would like them to look. That’s true - but they really do look fine, and are quite customisable, and you’ll also know for sure that they include everything that’s legally mandated to appear on an invoice. Businesses are very used to receiving invoices generated from all the major accounting platforms and are unlikely to judge the appearance of a Xero or FreeAgent invoice with your logo on harshly. Ultimately, the important thing about an invoice is that it gets paid!

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It's party time! Tax at Christmas 2022

After a party-free 2020 and a party-light 2021 perhaps it's going to be a party hard 2022!  If you're hoping to get the party started, here's a reminder about the tax rules around work Christmas parties and gifts.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are explicitly considered trivial by HMRC). Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67. Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax in full if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer, say, a bottle of whisky then that's still completely fine, and may well make great business sense! But a) you can only claim the VAT back on the gift if it costs less than £50 and b) you won't save corporation tax on it however much it costs. So a £49 bottle will cost a company £41 in the end (it can get the VAT back but can't save any corporation tax) and a £100 bottle will cost it £100 - it can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Should my company buy stuff before 31 March 2023, or after?

At present, companies buying plant and machinery (computers, machinery, furniture, vans, that kind of thing - not cars, though) can claim the Super-deduction.  This means that for every £1 they spend, they save tax as if they’ve spent £1.30.  Since corporation tax is currently 19%, this means they effectively save tax at 24.7% on those purchases this year.

This was put in place because corporation tax is going up in April 2023, and if nothing was done then companies would have deferred those purchases until then.  The Super-deduction was designed to put companies in a broadly similar position whenever they bought stuff, so as not to discourage investment.

So, with corporation tax going up in April, and the Super-deduction being withdrawn, does that mean it’s not worth thinking about when you buy new assets?  Not necessarily!  There are actually going to be three corporation tax rates in place:

• Companies with profits under £50,000 will still pay tax at 19%.  If you know your company will have profits of less than £50,000 each year, you should invest before the end of March.  You’re effectively saving 24.7% this year, not 19% next year, a big saving.
• Companies with profits over £250,000 will pay tax at 25%. If you know your company will have profits of more than £250,000 each year, it doesn’t really matter when you invest.  A 24.7% tax deduction this year and a 25% tax deduction a year later are more or less the same.
• Profits in between £50,000 and £250,000 will effectively be taxed at 26.5% - a “catch up” rate to go from 19% to 25%.  If you know a purchase will reduce your profits from less than £250,000 to more than £50,000, arguably you might want to wait until next year to invest, as saving 26.5% is better than saving 24.7%.  But it’s only a bit better, so you might as well just buy whatever it is as soon as it’ll be useful to you!

(Things are a bit more nuanced for companies that don't have a 31 March year-end, who won't get the full 130% deduction - but they'll still get more than 100%).

Of course, you should never buy anything solely to save tax!  You buy things to ultimately pay MORE tax, not less.  But if you’re going to buy something, the good news is that you’re not going to go far wrong by just getting it as soon as your company needs it.

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MTD for Landlords - what do you need to know?

UPDATE, DECEMBER 2022:  Nothing!  This initiative has now been postponed until (at least) 2026, and only landlords with revenue (initially) of £50,000 a year will now be affected.  But, here's what we said back in October anyway...

The government has a long-standing drive to make us report income to them a) digitally and b) more frequently - “Making Tax Digital”.  The initial phases of this forced all VAT registered businesses to submit their quarterly VAT returns online, with an unbroken link between the return and the source records.  This has basically worked well.  For businesses used to keeping paper or spreadsheet records, the jump they probably made to accounting software will have involved a bit of work, but most businesses were using software anyway, and many of those that weren’t have found life better with it.

The next phase will be a bit less smooth.  Making Tax Digital for Income Tax is going to force all sole traders and landlords with revenue of over £10,000 a year to make quarterly reports of their income and costs to HMRC, from April 2024 (partnerships won’t be brought in until 2025).  This won’t (for the time being, anyway) affect the calculation of annual profits, or the timetable for payment of tax, it’s just to give HMRC more timely in-year information to analyse.  Many or most of the sole traders will be using software already, so more regular reporting shouldn’t be too much of a burden for them.  Virtually none of the landlords will.

For smaller landlords - those with gross rents below £85,000 - the minimum required report will be rather simple; total revenue and total costs.  Not really enough for HMRC to do much analysis of.  Larger landlords will be required to file costs in more detailed categories.  99% (at least) of individual landlords are going to fall into the former category though; there aren’t many with rents of over £85,000 a year.

If you have gross rents under £10,000 a year, you don’t have to do anything in the first instance.  But if your revenue goes over that level, quarterly digital reporting becomes compulsory - and you can’t come out of the system unless you cease to have any such income, or it’s below £10,000 for three straight years.  Effectively, sole traders will be in until they retire, landlords will be in until they sell their properties.

It’s important to note that the £10,000 is revenue or gross rents, not profit.  So a sole trader with £12,000 of revenue and £9,000 of costs, making £3,000 of profit a year, must sign up, and so must a landlord with £13,000 of gross rents and £5,000 of costs.  And if you’ve both sole trader income *and* rental income, it’s the total that’s important.  So someone with £8,000 of sole trader revenue and a flat rented out for £500 a month must sign up - that’s £14,000 of income in total.

On the more generous side, if a couple own a rental property, then the £10,000 threshold is per owner - so if gross rents are £18,000, split 50/50, there’s no need to sign up to MTD (although, less generously, if the gross rents are £21,000, they will *both* have to make reports - a report is for a single individual).  And if you’ve income that doesn’t have to be reported on a tax return at all (like rent a room income below £7,500) then that’s disregarded entirely when deciding if you have to sign up or not (although, if you’re in for some other reason, the rent a room income *does* have to be disclosed in the MTD reports!).

One thing that on the face of it seems problematic is that owners of Furnished Holiday Lettings (FHLs) will have to make a different report in more detail - but you don’t always know if your property qualifies as an FHL until after the end of the tax year!  Presumably the suggestion will be to report as if it were an FHL.  At least owners of those properties are pretty likely to already be in the habit of keeping decent contemporary accounting records.

There will be some practical problems.  There’s supposed to be a digital link between the report you make and the underlying records.  But what if the underlying records are necessarily kept in different places?  Perhaps you own one property outright and 25% of an unconnected one with a group of other owners.  You’re going to have to aggregate those figures somehow and then report them to HMRC.  There’s a fudge called “bridging software” that can report from Excel records, not from accounting software, and it may come into play.

So, what should you do in terms of changing your record keeping?  At the moment, probably nothing.  Previous phases of MTD were repeatedly delayed; the general feeling is that this phase of MTD is 99% likely to happen, but maybe only 50% likely to happen in 2024 as planned.  When it does happen, we’ll be helping clients set up a system that will work for them.  FreeAgent have introduced a special version of their excellent bookkeeping software just for landlords, and for portfolio landlords who could actually benefit from more advanced tracking of multiple properties there are products like Hammock.  And for very simple cases, it might be that Excel and bridging software is fine.  For now, the important thing is just to know that it’s (almost certainly) going to happen!

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What can you claim for charging your electric company car at home?

Thanks to the incredibly generous tax rules that apply to them, the vast majority of new company cars now are electric.  Most of them are probably charged at home.  If you’re charging your electric company car at home, how much can you claim back from your employer to cover the cost?

HMRC’s guidance from the outset has been that you can claim back the cost of electricity relating to business miles but not private miles.  You could do that by trying to figure out the actual cost, but most normal people are going to use the shortcut of HMRC’s approved rate; 5p a mile (a recent increase from 4p a mile).  Using that kind of basis with an approved HMRC rate has always been the way it’s been done with traditional fuels.

However, a cat has recently been put amongst the pigeons.  The ICAEW has pointed out that, per the legislation, electricity *isn’t* fuel, so treating it as such is wrong.  It’s just one of the general costs of running the car.  That being the case, it’s legitimate for the employer to pay for *all* the electricity that goes into the car, not just the business part (just as it can pay for all the servicing, all the insurance and so on).  And at this moment, there seems to be general agreement that HMRC’s guidance on this is wrong.

There are a few things to say about this:

• We’re only talking about fairly modest amounts here!  A driver who was going to claim back 5p a mile for her 2,000 business miles but not her 8,000 private ones can now be reimbursed £500 by her employer, not just £100.  Nice, but not life-changing.
• Employers may not actually pay an employee the whole lot; in fact, they probably won’t on the whole.  Just because an employer *could* reimburse an employee for the cost of her private motoring doesn’t mean they will.  They’ll probably quite reasonably think that the employee can pay for their own life themselves.  Who is going to be reimbursed?  Company owners themselves, that’s who.  They’ll definitely claim as much as they can tax-free!
• It’s possible HMRC might be bloody minded and try to cling on to their guidance!  In any case, it’s pretty likely the government will legislate to close what’s perilously close to being a loophole - let’s be honest, electricity really is analogous to fuel in every way.

For now, though, the advice for directors with an electric company car is going to be - claim 5p a mile for all mileage from your company until HMRC slam the door again!

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